What do you do when a client cannot provide census data, then goes out

[MR]

lets say you have a client that started a 401(k) plan in 1997 and you became the TPA in late 1999. you come to find out that the client failed to provide complete census data to the prior TPA, so ADP testing was never done for 1997 or 1998. The client, which is a conglomerate of dental practices, then goes belly-up and claims it cannot provide complete census data for 1997, 1998, 1999 or 2000, but will "do its best". Now, it turns out that "its best" is not very good at all and you are certain that the data provided is at least incomplete and almost certainly innacurate. my inclination is to refuse to do the ADP test. i don't want to be blamed when this plan is audited and the agent finds the test to be based on bogus information. now suppose that the client says he wants to terminate the plan without having done the testing and wants us to send out distribution forms to the participants. if the plan would fail The ADP test for any of the years involved, it would be disqualified, so offering the employees the option of rolling their distributions to an IRA might get my firm in trouble, i think. what do you do? is it even possible for me to place the responsibility for bad rollovers onto the trustee by sending him a letter informing him that he has no assurance that the plan is qualified? i'd like to resign from the plan, but i empathize with all of the parties involved and don't want to leave them stranded, but i also don't want to get my firm in hot water.

[pjkoehler]

This is where you turn to your administrative services agreement to determine your firm's exposure to liability. Assuming your firm requires its clients to sign a standard form agreement and the agreement was drafted to protect the firm's interests, I suspect that you should have little if any exposure. You'll certainly want to review the agreement to assure yourself that it provides:

1. A condition on the firm's obligations to perform services based on the client providing it with complete and accurate information on a timely basis.

2. Representations galore throughout the agreement that your firm is not a fiduciary and performs only ministerial functions at the direction of the plan administrator.

3. A covenant that the firm's has no liability with respect to the plan's compliance or noncompliance with prevailing tax and legal requirements prior to the effective date of your firm's engagement.

4. An expansive indemnification provision that covers all damages, claims, liabilities associated with any act or failure to act that was predicated on the information provided by the client.

5. A provision that grants the firm the unilateral right to terminate the agreement without notice in the event it determines that the client has failed to provide complete and accurate information in the past or that there is reason to believe that multiple preexisting qualification failures occurred that were not disclosed at the time the agreement was entered into.

Even if the language of the agreement is fairly robust in insulating the firm from an exposure to liability in connection with its continuing to perform services, you should consider notifying the client that you are terminating your services, unless the client enters into a modification that bolsters your insulation in the manner described above and specifies very rigid time and responsibility timetables for the provision of all the information you require to complete the resolution of all outstanding issues. ONE OTHER THING: negotiate a new and improved fee schedule and the client is required to make progress payments. Otherwise, I'd suggest the firm consider walking away from this one. Do really need this business? It smells pretty bad![Edited by PJK on 08-23-2000 at 08:01 PM]